Tax Type
Retail Sales and Use Tax
Description
Sales of jet fuel/aviation gasoline; ground handling services
Topic
Appropriateness of Audit Methodology
Computation of Tax
Taxable Transactions
Date Issued
02-07-2005
February 7, 2005
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ********:
This is in response to your letter in which you seek correction of the retail sales and use tax assessments issued to ***** ("Taxpayer A") and ***** ("Taxpayer B"), for the period July 1999 through April 2002. I apologize for the delay in responding to your appeal.
FACTS
Taxpayer A and Taxpayer B (collectively, "the Taxpayers") are related companies that conduct flight support operations at Virginia airports. The Taxpayers make sales of jet fuel and aviation gasoline, and provide ground handling services to their customers. The handling services include towing aircraft, cleaning aircraft, baggage handling, deicing services, and skycap services. The Taxpayers impose a handling fee for the ground services and manpower involved in processing the arrival of the aircraft. The fee is generally waived for customers who purchase a certain amount of jet fuel over a certain period of time. The handling fee is based on the type of aircraft.
As a result of an audit conducted by the Department, the Taxpayers were assessed tax on the handling fee charged to its customers when taxable products were included on the same invoice. The Taxpayers contend the handling fees are not taxable because they are imposed in connection with the service they provide. Taxpayer A also seeks abatement of the assessed penalty. Taxpayer B objects to the gross sales amount used in extrapolation of the sales tax sample.
DETERMINATION
Handling Fees
Virginia Code § 58.1-609.5 1 provides, in pertinent part, that the retail sales and use tax does not apply to professional or personal service transactions that involve sales as consequential elements for which no separate charges are made.
Pursuant to Title 23 of the Virginia Administrative Code 10-210-4040 A, charges for services generally are exempt from the retail sales and use tax. Services provided in connection with the sale of tangible personal property are taxable, however. When a transaction involves both the sale of tangible personal property and the provision of services, generally the transaction is either taxable or exempt on the full amount charged, regardless of whether the charges for the services or the property are separately stated. The true object test is used to determine the taxability of these transactions.
Title 23 of the Virginia Administrative Code 10-210-4040 D sets out the guidelines used to determine the "true object" of a transaction that includes both the sale of tangible personal property and the provision of services:
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- If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.
In this case, the transactions at issue involve both the sale of tangible personal property and the provision of services. Therefore, the true object test must be used to determine the taxability of the transactions. The Taxpayers are in the business of providing flight support operations. While the Taxpayers may provide items of tangible personal property to their customers in connection with the flight support services, the information provided supports the conclusion that the true object of the transaction is the services provided by the Taxpayers. The items of tangible personal property transferred to the customers are not critical to the transactions. Accordingly, under the true object test the transactions at issue are deemed to be for a nontaxable service, and the handling fees are not subject to the tax. The audit will be revised to remove the handling fees.
Penalty- Taxpayer A
Title 23 Virginia Administrative Code 10-210-2032 A provides that the application of penalty to audit deficiencies is mandatory, and its application is generally based on the percentage of compliance ratio. For second generation audits, the penalty is generally applied unless the taxpayer's compliance ratios meet or exceed 85% for sales tax and 60% for use tax. In this case, Taxpayer A's sales compliance ratio for its second audit is 60%. Therefore, the auditor properly assessed penalty.
Because handling fees will be removed from the audit assessment in accordance with the above determination, the sales tax compliance ratio will be recomputed. If Taxpayer A's sales tax compliance ratio meets or exceeds 85%, the penalty will be abated.
Gross Sales - Taxpayer B
The gross sales figures used in the audit were taken from the Taxpayer B's Virginia sales tax returns. Taxpayer B has provided gross revenue reports for the audit period at issue; however, there is a discrepancy between the figures on the gross revenue reports and the gross sales amounts reported on the sales tax returns fled by Taxpayer B. The Taxpayer has not explained the discrepancy in its appeal letter. Absent a reasonable explanation, there is no basis to revise the extrapolation computed by the auditor. Therefore, the extrapolation computed by the auditor based on the gross sales amounts reported on Taxpayer B's sales tax returns is correct.
Conclusion
Based on this determination, the handling fee charges will be removed from the audit. A revised audit and updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the updated bill. Please remit your payment to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: *****.
The Code of Virginia and regulation sections cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions about this determination, you may contact ***** at *****.
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- Sincerely,
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Kenneth W. Thorson
Tax Commissioner
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AR/47803P
Rulings of the Tax Commissioner